Thursday, December 17, 2009

I have been buying silver exposure on this dip in drips and drabs the past week, 0.3% exposure here, 0.3% there [using Ultra Silver (AGQ)]. With King Dollar on fire, the knee jerk inverse relationship is in full swing and silver / gold is faltering. While predictable we wanted to see how far it goes... gold is still hanging in there just at its 50 day moving average but the story could turn for the worse technically tomorrow or even this afternoon.

Silver already seems to have broken down (this is the silver ETF, not physical silver) so I am going to cut back most of my silver here just under $17 and hope I can get it back in the $14 to mid $15s range. If it just reverses back up, no big deal - we'll just jump back in, but this market has become all about technicals so I am going to respect them.

[click to enlarge]

For the silver bulls (a) while silver has broken the 50 day moving average, it did so in late October (when the market last threatened to roll over) and shook it off immediately and (b) we have not made a new lower low. So it's not time to throw in the towel yet. I represented the October action above in a purple box - you can see those levels are important as that was not just the lows then but in September 09. A break below that would change the game.

We also see a gap from early September, below $15.50 which also is right around the 200 day moving average - so a move down to that level would be convenient. This base for silver broke out from the $14s which is why I said above, the $14s to mid $15s would be a nice area to retrench. I am not charting the Ultra product because I don't believe charting ETFs for 2x, 3x products makes any sense... the underlying index is what matters.

Since these are such crowded trades (long precious metals, short US dollar) I'm being extra cautious since we saw when hedge funds all pile into a trade how violent the exit can be many times the past few years. This might not be the moment, but there is no reason to take outsized risk. This is no way changes my views for the next 1, 3, 5+ years (just as my "long dollar" in no way changes my views there) - this is simply taking the other side of crowded trades for near term benefit.

After we sold the majority of our precious metal exposure on Nov 24th, (AGQ was sold near $70) I had only been doing some minor buying as it began to falter - it's only back up to a 1.2%ish stake so we're ridding ourselves of almost all that (with smallish loss) and turning back to an observer. Current price is in $58s as I type this, or about 17-18% down from sell point. More aggressive folk can of course outright short silver from here if so inclined - the random nature of commodities would slow me from doing that too often. Easier fish to fry. But the chart seems to portray more downside than up...

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